1. A newsstand receives its weekly order of “Weekly News” magazine on Monday & cannot reorder.

Each
copy costs Rs 15 and sells for Rs 20. Unsold copies may be returned the following week for Rs 4. When
the news stand runs out of copies and cannot supply a customer wanting, it estimates its “good-will”
loss at Rs 6 in future profits, figuring that the customer will take his business elsewhere for a couple of
weeks, on the average. Demand distribution is given below:
---------------------------------------------------------------------------------
Demand (No. of Copies) 10 15 20 25
---------------------------------------------------------------------------------
Probability .28 .35 .17 .20
---------------------------------------------------------------------------------
(a) Construct a payoff table and use it to determine the optimal number of copies to stock and the
expected profit.
(b) Computed Expected Value of Perfect Information (EVPI).
Enter Details 1 2 3 4
Marginal Profit 5 Produce 10 15 20 25 Max(Profit)
Probabilit Deman
Marginal Loss 11 Sr no y d
Opportunity
Loss 6 1 0.28 10 50 -5 -60 -115 50
2 0.35 15 20 75 20 -35 75
3 0.17 20 -10 45 100 45 100
4 0.2 25 -40 15 70 125 125
Max
1 Produce 15 Profit EPPI EVPI
82.2 46.7
Total Expected Profit 11.3 35.5 21.2 -11.8 35.5 5 5

2. Michael, Nancy, & Associates (MNA) produce color printers. The demand for their printers could be
light, medium, or high with the following probabilities.

Medium
Light Demand Demand High Demand
Probability 0.4 0.3 0.3

The company has three production alternatives for the coming period. The payoffs (in millions of
dollars) associated with the three alternatives are shown below.

Medium
Light Demand Demand High Demand
Alternative 1 18 28 20
Alternative 2 25 17 -5
Alternative 3 3 40 16

a. Compute the expected value of the three alternatives. Which alternative would you
select, based on the expected values?
b. Find the optimal strategy using EOL criteria

Payoff Table
Alternative Alternative Alternative
Prob 1 2 3
0.4 Light Demand 18 25 3
 Medium
0.3 demand 28 17 40
0.3 Heavy Demand 20 -5 16
E(X) 21.6 13.6 18
Select Alternative 1 based on Expected Value
Opportunity Loss Table
Alternative Alternative Alternative
Prob 1 2 3
0.4 Light Demand 7 0 22
Medium
0.3 demand 12 23 0
0.3 Heavy Demand 0 25 4
E(Loss) 6.4 14.4 10
Select Alternative 1 based on Expected Opportunity Loss

3. Technico Ltd has installed a machine costing Rs 4 Lacs and is in the process of deciding on appropriate
number of spare parts required for repairs. The spare parts cost Rs 4000 each but are available only if
they are ordered now. In case the machine fails and no spares are available, the cost to the company of
mending the part is Rs 18000. The plant has estimated life of 8 years and the probability distribution of
failures during this time, based on experience of similar machines is as follows.
No of 0 1 2 3 4 5 6+
failures
Probabilit .1 .2 .3 .2 .1 .1 0
y
Ignoring any discounting for time value for money, determine following:
a) The cost table and the optimal choice on the basis of expected cost principle.
b) The regret table and the optimal choice on the basis of expected regret criterion
c) Find EVPI

Enter Details
Marginal -
Profit 4000
Marginal
Loss 4000
Opportunity 1800
Loss 0

Produce 0 1 2 3 4 5 Max(Profit)
Sr Probabilit Deman
no y d
-
- 1600
1 0.1 0 0 -4000 -8000 12000 0 -20000 0
- -
1800 - 1600
2 0.2 1 0 -4000 -8000 12000 0 -20000 -4000
- - -
3600 2200 - 1600
3 0.3 2 0 0 -8000 12000 0 -20000 -8000
- - - -
5400 4000 2600 - 1600
4 0.2 3 0 0 0 12000 0 -20000 -12000
- - - -
7200 5800 4400 - 1600
5 0.1 4 0 0 0 30000 0 -20000 -16000
6 0.1 5 - - - - - -20000 -20000
9000 7600 6200 48000 3400
 0 0 0 0
Max
1 Produce Profit EPPI EVPI
- - - -
4140 2920 2060 - 1780
Total Expected Profit 0 0 0 17400 0 -20000 -17400 -9200 8200

Produc
e 0 1 2 3 4 5 Max(Profit)
Probabilit Deman
y d
1200 1600 2000 2000
0.1 0 0 4000 8000 0 0 0 0
1400 1200 1600 1600
0.2 1 0 0 4000 8000 0 0 0
2800 1200 2800
0.3 2 0 14000 0 4000 8000 0 0
4200 4200
0.2 3 0 28000 14000 0 4000 8000 0
5600 1400 5600
0.1 4 0 42000 28000 0 0 4000 0
7000 2800 1400 7000
0.1 5 0 56000 42000 0 0 0 0
Produc Min
1 e 3 Loss EPPI EVPI
Total Expected 3220 1080 3460 2640
Profit 0 20000 11400 8200 8600 0 8200 0 0

4. As a fund-raiser for a student organization, some students have decided to sell individual pizzas out side
the Union on Friday. Each pizza will sell for $1.75 and costs the organization $0.75. Historical sales
indicated that between 55 and 60 dozen pizzas be sold with the probability distribution given below:
Dozen of pizzas 55 56 57 58 59 60
Probability 0.15 0.20 0.10 0.35 0.15 0.05
To maximize the profit contribution, how many pizzas should be ordered? Assume pizzas must be
ordered by dozen. What is the expected value of perfect information in this problem? What is the
maximum amount the organization would be willing to pay for perfect information?
probabilit
y stock-> 55 56 57 58 59 60 max
deman
d
0.15 55 660 651 642 633 624 615 660
0.2 56 660 672 663 654 645 636 672
0.1 57 660 672 684 675 666 657 684
0.35 58 660 672 684 696 687 678 696
0.15 59 660 672 684 696 708 699 708
0.05 60 660 672 684 696 708 718 718
1
668.8 673. 676.0 671.2 663. 687.
660 5 5 5 5 2 5
11.45 EVPI

5. Center City motors Sales has recently incorporated. Its chief asset is franchise to sell automobiles of a
major American manufacturer. CCMS’s general manager is planning the staffing of the leadership’s
garage facilities. From information provided by the manufacturer and from the nearby dealerships, he
has estimated the number of annual mechanic hours that the garage will be likely to need.
Hours 10000 12000 14000 16000
 Probability 0.2 0.3 0.4 0.1
The manager plans to pay each mechanics $9.00 per hour and to charge customer $16.00. The
mechanics will work for 40 hour week and get annual 2 week vacation. Determine how many
mechanics Center City should hire? How much should Center City pay to get perfect information about
the number of mechanics it needs?
probabili stock-
ty > 5 6 7 8 Max
deman
d
6640 4768 2896
0.2 5 0 0 0 10240 66400
6640 7968 6096
0.3 6 0 0 0 42240 79680
6640 7968 9296
0.4 7 0 0 0 74240 92960
6640 7968 9296 10624 10624
0.1 8 0 0 0 0 0

6640 7328 7056

1 0 0 0 55040 84992

11712 EVPI

6. Emily Scott, head of a small business consulting firm, must decide how many M.B.A.s to hire as full-
time consultants for the next year. (Emily has decided that she will not bother with any part-time
employees.) Emily knows from experience that the probability distribution on the number of consulting
jobs her firm will get each year is as follows:
Consulting jobs 24 27 30 33
Probability 0.3 0.2 0.4 0.1
Emily also knows that each M.B.A. hired will be able to handle exactly three consulting jobs per year.
The salary of each M.B.A. is $60,000. Each consulting job is worth $30,000 to Emily’s firm. Each
consulting job that the firm is awarded but cannot complete costs the firm $10,000 in future business
lost.
(a) How many M.B.A.s should Emily hire?
(b) What is the expected value of perfect information to Emily?
probabilit
y stock-> 8 9 10 11 Max
deman
d (in thousands)
Ans
9or10 0.3 24 240 180 120 60 240
EVPI 0.2 27 210 270 210 150 270
54 0.4 30 180 240 300 240 300
0.1 33 150 210 270 330 330

1 201 225 225 177 279

7. The Writer’s Workbench operates a chain of word-processing franchises in college towns. For an hourly
fee of $8.00, Writer’s Workbench provides access to a personal computer, word-processing software,
and a printer to students who need to prepare papers for their classes. Paper is provided at no additional
cost. The firm estimates that its hourly variable cost per machine (principally due to paper, ribbons,
electricity, and wear and tear on the computers and printers) is about 85¢. Deborah Rubin is considering
opening a Writer’s Workbench franchise in Ames, Iowa. A preliminary market survey has resulted in
the following probability distribution of the number of machines demanded per hour during the hours
she plans to operate:
Number of machines 22 23 24 25 26 27
 Probability 0.12 0.16 0.22 0.27 0.18 0.05
If she wishes to maximize her profit contribution, how many machines should Deborah plan to have?
What is the hourly expected value of perfect information in this situation? Even if Deborah could
obtain a perfectly accurate forecast of the demand for each and every hour, why wouldn’t she be willing
to pay up to the EVPI for that information in this situation?
probabili stock-
ty > 22 23 24 25 26 27 max
deman
d
Ans 156.4 155. 154.7 153.0
26 0.12 22 157.3 5 6 5 153.9 5 157.3
164.4 163. 162.7 161.0 164.4
0.16 23 157.3 5 6 5 161.9 5 5
EV 164.4 171. 170.7 169.0
PI 0.22 24 157.3 5 6 5 169.9 5 171.6
164.4 171. 178.7 177.0 178.7
1.8 0.27 25 157.3 5 6 5 177.9 5 5
164.4 171. 178.7 185.0
0.18 26 157.3 5 6 5 185.9 5 185.9
164.4 171. 178.7 193.0 193.0
0.05 27 157.3 5 6 5 185.9 5 5
1
163.4 168. 171.5 172.5 172.0 174.3
157.3 9 4 5 4 9 2